Today’s piece was originally published on John Goodell’s blog, Meet Me on the High Ground. Be sure to take a look as his blog offers insight on long term retirement planning and other important aspects you should consider as you look at your financial future. On a side note, if you are currently a Commander or otherwise responsible for service members members, stay tuned for a number of resources and classes on financial literacy. In the coming weeks, we will publish a number of products that are beneficial for service members looking at everything from purchasing vehicles to enrolling in the TSP.
A career in the military can be rewarding from both a professional and financial standpoint. From a professional standpoint, many find joy in the leadership experience, travel opportunities, and service to the nation afforded by the pursuit of a 20-year military career. While the professional development opportunities are unparalleled, many fail to take advantage of some of the financial opportunities afforded by the military. A 20-year career as an officer in the military with standard promotions, for example, adds up to over $1.6 million in base pay alone (based on 2020 pay charts). This does not include tax free allowances such as Basic Allowance for Housing (BAH), Cost of Living Allowance (COLA), and Basic Allowance for Subsistence (BAS). Many service members make financial mistakes that prevent them from enjoying their lives even more as they grow older and approach retirement. We’ll take a look at a few of those mistakes today:
1. Not Investing Early Enough: Investing for retirement is not an old person’s game. It is something that every E-1 and O-1 should be concerned with on the day that they enter the service. Beginning to invest at a young age is essential for future wealth. Assuming a return of 8% (Essentially average for the S&P 500 over the course of history) an individual who invests $5,000 a year from age 25 to 35 will have over $183,000 more at age 60 than an individual who invests $5,000 a year from age 35 to 60. With the power of the blended retirement’s matching contributions and a basic training age of 18 or commissioning age of 21 or 22, the difference becomes even more pronounced. Start investing the day you start to serve. You’ll thank yourself later.
2. Not taking advantage of the Career Starter Loan (Officers): The career starter loan varies depending on when and how you take it. For me personally, the loan was $36,000 at 0.75% interest over six years. That is less than half of the rate of inflation during that time period – a no brainer. While most officers take some form of the career starter loan, many don’t use it wisely. Buying a brand-new truck right off of the lot might seem tempting at the time, but investing that money is a much better deal. That truck you purchase will be worth less than half of what you paid for it in six years, but an investment in even a conservative index fund will return you at least 20%.
3. Not considering purchasing a home if the numbers look good: Real estate markets vary from location to location, but the 1% rule is generally a good thing to consider when purchasing a home. If the monthly rental income for the home you are considering purchasing is at least 1% of the home’s value, that home might be worth purchasing. Throwing away BAH on a rental or living on post is not always ideal (though in certain situations it is warranted). You sacrifice hundreds of thousands in potential equity by the end of your career. Also, consider house hacks such as purchasing a duplex and renting out the other half or renting a room to a roommate. These methods enable you to take full advantage of your BAH and return a good portion of it to your bank account.
4. Not considering insurance alternatives: SGLI is great, but VGLI can be incredibly expensive when you separate from the military. When you retire or ETS, you still want to ensure that your family is covered in the event that you pass away but you don’t want to break the bank. Prior to an ETS or retirement, consider acquiring a “whole life” insurance policy before beginning medical evaluations for VA benefits. Doing so will likely save you money compared to a term policy or whole life policy purchased after the evaluation. Once you become medically disabled, life insurance rates increase dramatically.
5. Making Unwise purchases: Toys are great, but living beyond your means isn’t practical. If you find yourself living paycheck to paycheck, consider evaluating your budget and cut out the excess. Unwise purchases such as expensive cars, expensive boats, and luxury items add up quickly, especially in the form of monthly payments if financed. Putting that money towards more productive uses such as maximizing your Roth IRA or making home improvements proves much more beneficial to wealth generation.
6. Not taking advantage of benefits: Many service members fail to remain aware of all of the benefits that the military affords. Are you taking the SAT for your undergrad? Are you taking the GRE or GMAT for your Master’s degree? The military will pay for you to take each test once. Did your wife just pay to change her real estate license to the state you just PCS’d to? The military will contribute $1,000 towards that license. Remaining aware of the benefits afforded to you as an active duty service member saves you thousands of dollars over the course of time.
7. Not protecting Your property: Insurance…. insurance…insurance. You don’t know how good yours is until you need it. Know your policy’s deductible so that when the time come to use it, you don’t have to pay a large amount of pocket. Additionally, companies such as USAA have policies for high value items such as class rings, watches, and other jewelry. I personally know a guy who had his Rolex stolen while in Europe and his insurance paid for a new one. Ensuring that your valuables are insured proves incredibly beneficial… Accidents happen.
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